Hirequest, Inc. (then Command Center, Inc.) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2019. The filing reports Command Center’s pre-merger results; Hire Quest was acquired on July 15, 2019, after quarter-end, and is not included in these financial statements.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $24.84 million | $24.18 million | $46.59 million | $46.64 million |
| Gross profit / margin | $6.55 million / 26.4% | $6.28 million / 26.0% | $12.18 million / 26.1% | $11.87 million / 25.5% |
| Operating income (loss) | $877,000 | $820,000 | ($108,000) | ($892,000) |
| Net income (loss) | $412,000 | $563,000 | ($333,000) | ($654,000) |
| Adjusted EBITDA (non-GAAP) | $1.37 million | $1.30 million | $1.25 million | $1.71 million |
- Q2 revenue increased 2.7% year over year, which management attributed to organic growth. First-half revenue was essentially flat.
- Q2 net income declined despite higher revenue and gross margin, as SG&A and income tax expense increased. First-half net loss narrowed, while adjusted EBITDA fell about 27%.
- Management attributed improved staffing-service cost ratios mainly to lower workers’ compensation costs, with lower unemployment costs partly offset by higher wages and payroll taxes.
- At June 28, cash was $6.91 million, restricted cash $106,000, and net receivables $10.23 million. Working capital was approximately $13.0 million. First-half operating cash flow was negative $870,000, versus negative $87,000 a year earlier; cash and restricted cash declined by $988,000 to $7.02 million.
- Quarter-end account-purchase-agreement borrowings were $526,000; the filing reported only about $2,000 available under that facility. It was subsequently paid off and terminated. Quarter-end lease liabilities were $1.62 million. The filing does not report funded borrowings under the replacement facility at quarter-end, as that facility was entered into after the reporting date.
Material changes and subsequent events
- On July 15, 2019, Command Center completed the Hire Quest merger. Hire Quest security holders received 9,837,336 shares and held about 68% of the combined company immediately after closing. Following a tender offer repurchasing 1,394,821 shares for approximately $8.4 million, their ownership was approximately 75%.
- The company entered a BB&T revolving credit facility of up to $30 million, including a $15 million letter-of-credit sublimit, maturing May 31, 2024. It is secured by substantially all operating assets and includes a minimum fixed-charge coverage ratio of 1.10:1.00.
- On July 15, the company sold assets of 33 branches for approximately $4.7 million in buyer promissory notes bearing 6% interest, plus a contingent Phoenix-area payment tied to sales. These locations were to operate as franchises.
- Merger-related legal and professional fees were approximately $341,000 in Q2 and $1.0 million for the first half. Management said certain merger facilitation costs were nondeductible, contributing to a higher 2019 effective tax rate.
Outlook, risks and contingencies
- The filing provides no quantified financial guidance. Management cautioned that first-half results are not necessarily indicative of full-year results.
- Key risks include integration execution, realizing merger benefits, converting company-owned branches to franchises, franchisee performance and compliance, and the combined company’s ability to manage a larger operation. Franchise conversion reduces direct control and creates dependence on franchisees for operating performance and payments.
- Hire Quest’s post-merger ownership concentration may limit other shareholders’ influence. The company also disclosed a potential personal-holding-company tax risk, though it did not expect to meet the income test in 2019.
- A $260,000 net asset tied to the Freestone insurance-company liquidation remained at risk. Management estimated potential loss up to that carrying amount and said recovery depends on the liquidation and court proceedings.
- Customer and vendor concentrations increased: one customer represented 14.4% of receivables, and two vendors represented 72.7% of accounts payable at June 28. The company was largely self-insured for workers’ compensation and had approximately $6.2 million of collateral support outstanding.
Important facts for investors to verify
- Post-merger reported results, including the accounting treatment of Hire Quest as the acquirer and purchase-price allocation.
- Progress and economics of the franchise transition, including collections on branch-sale notes and franchisee operating performance.
- Use, availability, pricing, and covenant compliance of the BB&T facility, including letters of credit and the fixed-charge coverage test.
- Cash conversion and the drivers of negative first-half operating cash flow, particularly receivables and accrued liabilities.
- Potential recovery from Freestone and any changes to workers’ compensation reserves or collateral requirements.